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There’s a war going on for the future of the home, with consumer electronics manufacturers on one side and the PC industry on the other. Both sides want their gear to be the eventual “hub” of the digital home. CE vendors, like Sony, see the television and the set top box as the hub, while the PC industry is countering with Media Center Edition PCs, wireless media adapters, and Intel’s forthcoming Prescott chip which improves the Pentium 4’s ability to handle high quality audio/video media.

In case you’re not familiar with MCE, it’s Microsoft’s latest and greatest entertainment move. A MCE PC can tune into TV, and includes TiVo-like DVR functionality. The MCE PC can also act as the central server for a home’s music, store and display digital photos, and act as a central repository for home-made video content.

With the latest version of MCE, which launched late last year, Microsoft has also launched an online portal that provides direct, remote control-accessible, access to a large variety of online entertainment content. And Microsoft’s hardware partners have done a great job of packaging MCE PCs to look less like bulky mini-towers and more like sleek CE that fits into any family room’s décor (check out Gateway’s FMC-901 that looks just like a home theater receiver, or their 610 Media Center, which has all the electronics slickly built into a flat panel display).

There’s more coming too. At CES this year, we saw the first demonstrations of devices that “remote” the MCE experience throughout the home wirelessly or using other home networks. Inexpensive MCE extenders were on display, as were integrated products (such as plasma TVs) that have built-in MCE extender functionality. When these products hit the market later this year, the MCE will truly be capable of functioning as the central media server in the home - without requiring any significant level of PC geek abilities for users to make it all work.

There are just a few shortcomings of the MCE PC today. First, HDTV is not yet supported, a situation which we believe will be quickly rectified in one of the next versions of MCE. Second, the DVR functionality supports only one TV tuner card - so users can’t record one program while watching another. This too, must be rectified before the MCE can claim feature parity with the CE world.

For service providers, the rise of the MCE presents a great challenge. Many service providers are building future product plans around the concept that they’ll be able to provide customers with gateway or set top products that control the distribution of services throughout the home. The MCE throws a monkey wrench in these plans by taking this functionality out of the hands of the service provider and putting it into the hands of the consumer. Service providers are trying desperately to get out of the “dumb pipe” business. The MCE could put them back into that role by making Microsoft (and PC vendors) the masters of the home entertainment portal.

Service providers need to have an MCE strategy. For example, SBC has had some great success with their Yahoo! broadband partnership - but where does the MCE fit into this partnership? Is there a way for the SBC Yahoo! content to fit into the MCE online portal? Is there a potential for partnership? Can the service provider help with the wireless networking side of the equation?

DSL providers have been involved in the PC business before. Can MCE fit into service providers’ new service bundles? With the MCE PC’s ability to play nicely with satellite TV, the combination could work well with the service providers’ new bundles with DirecTV or EchoStar. Imagine an HD-capable MCE PC bundled with faster DSL, wireless networking and the new VOOM HDTV satellite service... That’s a package no cable company can touch today.